Demand for the Chinese currency in Hong Kong is rising and may lead to tighter liquidity in the city, HKMA Chief Executive Norman Chan said today. Hong Kong’s de facto central bank had to tap its swap agreement with the PBOC in October last year after demand for trade settlement in yuan exceeded expectations. Cross-border trade settled in the currency through Hong Kong rose to more than 1.3 trillion yuan in January through September, according to the HKMA.

The renewal of the agreement “is crucial in helping us to provide liquidity, when necessary, to maintain the stability of the offshore renminbi market in Hong Kong,” Chan said in a release on the central bank’s website today, referring to the yuan by its official name.

Frances Cheung, a senior strategist at Credit Agricole CIB, wrote in a research note that the swap will allow the HKMA to offer banks yuan and also expand the portion of its reserves invested in the currency in onshore markets as it diversifies from the dollar.